Romney’s Taxes: Too Little or Too Much?

Much has been made of Mitt Romney’s asserted 15 percent or so tax rate. There is both a material error and an irony to this story.

The release of Romney’s tax returns for 2009 and 2010 and a preliminary assessment for 2011 shows a remarkably consistent picture. First, he makes a pretty penny, but we knew that. His income is about $20 million a year, and he consistently pays about 15 percent in federal income tax. Most of his income is either dividends or capital gains, which are each taxed at 15 percent. The governor appears not to be a big fan of bonds, which are taxed at much higher rates, and appears to have earned relatively little wage income, which is hardly surprising given his political campaign.

A 15 percent rate on capital gains and dividends is the law, and no one credibly disputes that Romney paid what was owed under the law. Those who argue for higher taxes believe that those who make more should pay more. Well, in addition to paying about 15 percent in taxes, Romney consistently donates about 15 percent of his income to charity. These are sums that need not be squeezed out of taxpayers by threat of penalty but are given voluntarily to support efforts that the government acknowledges via the tax law are worthy of special consideration.

So, combining these two direct measures, about 30 percent of his resources are made available to the community at large, half of which is done voluntarily, half through the national government. The “fair share” brigade should be more than satisfied

The irony in all this, despite the catterwalling of the mainstream media—and even some of his opponents—about tax fairness and is that President Obama has consistently proposed raising the tax rate on capital gains and dividends to all of 20 percent. Any increase in these rates would be foolish and harmful to the economy, but even if the rates had been 20 percent and Romney had then paid about 20 percent of his income in taxes, would the media respond less rabidly? Not likely.

Why would it be an outrage under those circumstances for Romney to pay 20 percent and yet perfectly fine for Obama to propose that Romney pay 20 percent?

Put another way, has President Obama just been a softy all along when it comes to wealth redistribution? Or does he recognize, all heated political rhetoric notwithstanding, that high tax rates on capital hurt the economy, meaning it hurts workers and their families? It’s just one of those inconvenient truths that we can’t have a 15 or 20 percent tax rate on dividends and capital gains without collecting only 15 or 20 percent from the Mitt Romneys of the country.

That leads to the material error. He didn’t pay around 15 percent. There are at least two levels of tax; the 15 percent component is just one of the two. At the very least, he paid nearly 45 percent, but a chunk of this tax was collected before he even saw the remainder. Income from capital gains and dividends means the income was first earned by businesses, most likely corporations, which pay tax at 35 percent. So Romney paid his 15 percent only after the government had taken its 35 percent cut. That leaves Romney with a combined tax of 45 cents on the dollar of corporate earnings. (Warren Buffett, are you listening?)

And, in all likelihood, even before he invested the money where it is currently, some had been subjected to taxes on capital income repeatedly in the past—tax level three. And at some point a good chunk of it, perhaps all, was taxed at the individual rate as wage or salary income—tax level four. While these additional levels of tax are incalculable without knowing the governor’s entire financial history, it surely raises the tax above 50 percent and likely much higher.

With capital income subjected to two, three, four, or more levels of tax, consider again President Obama’s proposal to raise the tax on the last level of tax—the tax on dividends and capital gains—to 20 percent. By only raising it to 20 percent, Obama implicitly acknowledges the importance of private saving and investment. But as we see, the true rate is not 15 percent but something much higher. Either equity finance and business formation really matter, in which case Obama should propose to zero-out these taxes altogether, or they don’t matter, in which case raising the rate to only 20 percent is inexplicable. Obama should explain this conflict in views, but don’t hold your breathe.

Rather than exposing an example of an unfair tax system in which the rich appear not to pay their fair share, the recent Romney episode demonstrates in headline type the heavy true burden that falls on saving and investment in America and why we need tax reform to fix it. And for those who still seek that pound of flesh, watch those charitable contributions.

The Daily Signal depends on the support of readers like you. Donate now

JD Foster is the Norman B. Ture Senior Fellow in the Economics of Fiscal Policy at The Heritage Foundation. His primary focus is studying long-term changes in tax policy to ensure a strong economy. He also examines changes in Medicare, Medicaid and Social Security so they are both affordable and more effective.

What would be so wrong in allowing companies to write off dividends as a cost of doing business, and then taxing ALL income, regardless of source, at the individuals income tax rate? Because what we have right now is not an INCOME tax, but a WAGE tax.

I'm not a fan of Romney, but the attacks on his tax rate is nothing more that continuing Obama class warfare policies. Romney is paying what the law requires. If we want different tax laws, then change the tax code. But don't follow Obama's plan to pit the poor against the rich. If we take every dollar from all the "rich"
would that add one dollar to your pocket? Or would it add to the endless pockets of the federal government?

As a tax accountant, I understand the double taxation of dividends and of the funds used to create long term capital gains.

Sadly, conservatives have done a poor job of spreading this message to the American people. We need to step this effort up, along with stepping up the articulation of all of our founding principles.

It should be known that when Barack Obama, any other liberal politician, or Warren Buffet, all of whom know better that Buffet does not pay a lower tax rate than his secretary, are lying to the American people.

How would you know? Have you seen his tax records? Just because you are a tax accountant does not mean you know the ins and out of their taxes. Meaning Buffet and his secretary. Do not broad stream things.

Nice job on ACTUALLY doing some investigative reporting…but be careful, your left-leaning readership's head's may explode when the try to comprehend the basesless, empty blubber that comes out of our "savior's" mouth.

You're splitting hairs here Eva. The whole idea behind charity is that it can be directed by the giver into specific charitable purposes. Should a donation to Operation Smile also be excluded because it goes only to kids with cleft pallets, and is not available "at large"?

An excellent, simple explanation of the "Tax the Rich" fraud. Capital, Capitalism and Capitalists – words almost gone from our everyday language are creeping back in spite of near death by a PC public…Even in Heritage reports and studies. Thanks Dr. Foster for "capital income" and the facts that Governor Romney still doesn't see;15% tax rate is never 15%…under the 16th Amendment.

You people need to get over yourselves! Romney gives to charity so he can get a tax deduction, all the rich do it. Are you that naive? I know I am going to get slammed with thumbs down and "hate" mail, but the President is correct! The only way to fix the mess we are in is to have the rich pay their fair share, and they are not. This "Income from capital gains and dividends means the income was first earned by businesses, most likely corporations, which pay tax at 35 percent." does not not matter. It is the corporation that was taxed NOT Romney. Out of Romney's TAKE HOME PAY he only paid LESS THAN 15% TAX! How is that fair when he made over $40 million. I know people on social security that pay more than 15% while earning much much less. Tell me, how is that fair?

Donating millions to charity is what those terrible rich people do to avoid taxes. Jann is here to tell us that they really don't care about helping those charities. Wow, and BTW "ALL the rich do it." Are you kidding me Jann, and you call us naive? IMHO, your post is classic Class Envy. Obviously Jann's anwer to this article is the rich pay too little even with the facts that the top 10% of earners pay 70% of our federal income tax. Jann's definition of fair is way differnt than mine. If Romney filed his taxes correctly, than in my opinion he paid his "fair share." At a certain point tax rate is irrelavant, especially in Romney's case. He paid $3,000,000.00+ …that is my definition of a fair amount.

I find J. D. Foster's arguments unpersuasive. The bulk of Romney's income was in the form of capital gains. Foster combines dividends and capital gains and and then asserts that they were both taxed at 35% prior. Potentially true for dividends if the corporation paid income tax and their marginal rate was 35%. Not seeing how this applies to capital gains though, because capital gains to an individual are not corporate earnings, therefore are never subject to corporate tax, at least at Foster's "second level". His further levels of taxation have the same problem, confusing "corporate earnings" with capital gains. His third level ignores the concept of basis in calculating capital gains. Finally, he speculates that part or all of said capital gain was at one time in the past subject to tax as salary. Really. Now corporations are people and business assets earn wages! I find J. D. Foster's arguments unpersuasive. He combines dividends and capital gains and and then asserts that they were both taxed at 35% prior. Potentially true for dividends if the corporation paid income tax and their marginal rate was 35%. Not seeing how this applies to capital gains though, because capital gains to an individual are not corporate earnings, therefore are never subject to corporate tax. His further levels of taxation have the same problem, confusing "corporate earnings" with capital gains. His third level ignores the concept of basis in calculating capital gains. Finally, he speculates that part or all of said capital gain was at one time in the past subject to tax as salary. Really? Now business assets earn wages!
This seems to be a fast and loose magic act to con the unwary.

Don’t have time to read the Washington Post or New York Times? Then get The Morning Bell, an early morning edition of the day’s most important political news, conservative commentary and original reporting from a team committed to following the truth no matter where it leads.

Email address

Ever feel like the only difference between the New York Times and Washington Post is the name? We do. Try the Morning Bell and get the day’s most important news and commentary from a team committed to the truth in formats that respect your time…and your intelligence.